Monday, January 4, 2016

SPX and INDU Updates: Pattern Still Incomplete, and Still Pointed Lower

On December 21, I concluded:

TRAN's break of the flash crash low has far-reaching implications for the overall pattern, and suggests that another leg down is pending for the broad market.  It will take a sustained breakout over the all-time-high in SPX to call that into question, so unless and until that happens, we're going to operate under the assumption that the intermediate edge has to be given to bears. 

I also warned of a potential complex flat, which would rally back toward the top of the recent trading range before declining again -- that scenario was noted as preferred in all subsequent updates, and now appears to be exactly what's happening.  The question of the day is whether we're starting the predicted larger bear leg immediately, or if there's still another down/up/down sequence in store.  I can't answer that for certain, but there are a few things we can watch for, which I'll cover after the charts.

Last update noted that the rally had finally satisfied its minimum requirements after breaking 2076, and that the b-wave was thus free to peak -- and apparently it wanted to do so immediately.

The 30-minute chart I've been publishing for the past few weeks (which kept us firmly on the right side of this trade) was getting a bit cluttered, and StockCharts won't let me zoom out any farther on a 30 -- so I've drawn up a new hourly chart to provide a broader perspective.

INDU presents in a similar fashion.  Here, I'm still using the 30-minute, since the SPX chart above hopefully provides the larger context well enough:

So, what do we watch for to tell us if the more complex flat is unfolding, or if the wheels are instead going to come off the market immediately?  Well, the simple answer is:  We watch for an impulsive rally out of one of the inflection zones.  If we see a clean five-wave impulsive bounce from, say, SPX 1969.73, then we'll be on alert.  That first bounce should give us both a conservative upside target (the conservative target will be the expected target if the bounce is only a simple ABC), and a more aggressive target (which we already have, near the top of the range). 

On December 29, I alerted folks on our forums in a NOT TRADING ADVICE sort of way that it was a good time to start building short positions.  So, if we do not see any decent-sized impulsive bounces along the way, then we simply stay short until we do (also not trading advice), and ride this as a third wave decline. 

In conclusion, in the bigger picture, TRAN remains the fly in the ointment for bulls.  As discussed previously, it appears to have changed trend at higher wave degree (from up to down).  This remains significant because TRAN tends to lead the broad market. 

On the shorter time frames, the pattern still suggests two things:  It's incomplete, and it's pointed lower.  An incomplete pattern pointed lower is not helpful to bulls -- it's like a "to be continued" TV episode; it's essentially a tension on the market, and it seeks resolution in the form of lower prices.  Thus, the best case for bulls appears to be another down/up/down sequence that could then have the potential to find a bottom (again, though, that would be from lower prices).  The best case for bears is the potential bear nest shown as "MB" on the SPX chart, and which precipitates a waterfall decline.  Trade safe.

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